Ever since I hit the big 3-0, the prospect of buying a house has been on my mind. My one-bedroom apartment just isn't big enough for two people, serious furniture, entertaining, indoor gardening, and the kitten I desperately want. I'd also like to stop paying rent and put my money toward something permanent. Now that the housing industry is singing the blues, I should be dialing up a real estate agent, right? Perhaps I've missed my chance: Since last year, I've been on a stock-market shopping spree that's consumed most of my extra cash.
This predicament makes me wonder: Is it better to take advantage of a historic opportunity to buy cheap stocks or to make a down payment? Persuasive as the stock story is, the housing market is pretty alluring: Home prices nationally are down more than 20 percent from their 2006 peak, and interest rates on 30-year fixed mortgages are flirting with 40-year lows. Of course, it doesn't have to be an either-or choice: I could always bump up my 401(k) contributions while funneling money into a house fund. I decided to ask a few pros to weigh in:
Don't assume. While there might be a raging fire sale on real estate in Stockton, Calif., don't count on landing a dirt-cheap loft in San Francisco. Unfortunately, the best deals are far from city centers, says Keith Gumbinger, vice president of HSH Associates. In the same vein, stock investors can't rely on the swift and generous returns gifted in the 2003-07 bull market. Still, it's reasonable to assume that the market will deliver in the long term: According to Morningstar, large-company stocks gained an average of 10 percent a year from 1926 through 2008, or 7 percent after inflation.
Take your time. If it's a home you really want, don't worry about nabbing a piece of real estate right away. "Prices have fallen a long way, but they still have a lot further to go," says Richard Moody, chief economist at Mission Residential. Mortgage rates could also fall further, depending on the Obama administration's plans. "There's been a lot of talk about 4.5 percent or even lower," he says. It's the same deal with the market: No one knows when stocks will actually hit bottom, so there's no sense in tossing all your money in immediately. A better idea is to parcel out your contributions monthly or every two weeks.
Look past the raw numbers. The house-flipping trend is long over. You might get a financial reward if you buy and hold in an area that's supportive, but don't count on making a quick buck. Even the long-term outlook isn't as rosy as you think: Yale economist Robert Shiller, who studied U.S. home prices over the past century, found that the rise in prices roughly matched changes in people's incomes over the long term. "You always hear that owning a home is the best way to build wealth, but in terms of returns, it's actually not that great of an investment," says Moody. The bottom line, as Carmen Wong Ulrich, the host of CNBC's On the Money, puts it: "A house is not only a symbol of financial strength and stability. It serves you with a roof over your head and a place to have family and friends. Priceless." My bottom line? Stocks seem like the simpler choice, but buying a house guarantees a huge return for me—even if it's not financial.